This preview shows pages 1–2. Sign up to view the full content.
This preview has intentionally blurred sections. Sign up to view the full version.View Full Document
Unformatted text preview: 26 Answers to Textbook Questions and Problems inflation. A nominal variable is one that is measured in currentdollar.,; the value.of the variable is not adjusted for inflation. For example, a real variable could be a Hershey s landy bar, "he nominal variable is the current-price value of the Hershey's candy b a r- 5 cents in I960, say, and 75 cents in 1999. The interest rate you are quoted by your banT-8 percent, say-is a nominal rate, since it is not adjusted for inflation. If infla- tiof is, say! 3 percent, then the real interest rate, which measures your purchasing power, is 5 percent. Problems and Applications 1 Money functions as a store of value, a medium of exchange, and a unit of account 7 A credit card can serve as a medium of exchange because it is acceptedin exchange for goods and services. A credit card is, arguably, a (negative) store of value because you can accumulate debt with it. A credit card is not a unit of accounta car, for example, does not cost 5 VISA cards. b. A Rembrandt painting is a store of value only. , - . , . . f c A subway token, within the subway system, satisfies all three functions of money. Yet outside the subway system, it is not widely used as a unit of account or a medium of exchange, so it is not a form of money. 2 The real interest rate is the difference between the nominal interest rate and the infla- tion rate. The nominal interest rate is 11 percent, but we need to solve for the inflation rate. We do this with the quantity identity expressed in percentage-change form: % Change in M + % Change in V = % Change in P + % Change in Y....
View Full Document
This note was uploaded on 09/20/2009 for the course ECON 1 taught by Professor Mcferrin during the Spring '09 term at NMSU.
- Spring '09